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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Which of the following changes in a manufacturing firm's circumstances would normally INCREASE its working capital requirement, other things remaining the same?

Lengthening the raw material storage period raises working capital requirement because more money is blocked in stock for longer. Shorter production cycles, stricter customer credit and longer supplier credit all shorten the cash cycle or add financing, so they reduce the requirement.

  1. AA shorter production cycle due to new machinery
  2. BTightening of credit terms allowed to customers from 60 days to 30 days
  3. CLengthening of the raw material storage period because of unreliable suppliersCorrect
  4. DReceiving longer credit from suppliers

Explanation

A longer raw material holding period locks up more funds in inventory, so working capital need rises. The other three changes shorten the operating cycle or increase spontaneous financing, reducing the need.

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